Watch HowardCohodas Trade Index Options Credit Spreads

This is a discussion on Watch HowardCohodas Trade Index Options Credit Spreads within the Trading Journals forums, part of the Reception category; Originally Posted by HowardCohodas My strategy is to trade credit spreads as a unit. The price of the legs is ...

Closed Thread
 
LinkBack Thread Tools Search this Thread
Old Dec 2, 2010, 11:25pm   #57
Joined Mar 2010
Re: Watch HowardCohodas Trade Index Options Credit Spreads

Quote:
Originally Posted by HowardCohodas View Post
My strategy is to trade credit spreads as a unit. The price of the legs is immaterial. By specifying the credit required, the fill does not take place unless that price, or better, is obtained.

The Iron Condor is just the icing on the cake. The spread that completes the Iron Condor must be able to stand on its own. The icing part is that no additional funds are quarantined (margin) to put on the second spread of an Iron Condor. This provides a nice profit boost with some small additional risk.
Ok. So you trade two credit spreads to create an iron condor. I get it now i think. So if you think the ftse range is 5600-5800. and the market is trading 5800. you sell a call at 5900 and buy a call at 6000 at the same expiry. When the market is trading 5600 you sell a put at 5500 and buy a put 5400.
brettus is offline  
Old Dec 2, 2010, 11:35pm   #58
 
HowardCohodas's Avatar
Joined Sep 2010
Re: Watch HowardCohodas Trade Index Options Credit Spreads

HowardCohodas started this thread
Quote:
Originally Posted by brettus View Post
Ok. So you trade two credit spreads to create an iron condor. I get it now i think. So if you think the ftse range is 5600-5800. and the market is trading 5800. you sell a call at 5900 and buy a call at 6000 at the same expiry. When the market is trading 5600 you sell a put at 5500 and buy a put 5400.
Unfamiliar with options on FTSE. See FAQ in signature for description of what I trade and the related distance between the short option strike and the long option strike.

If that fails to make things clear, give me another go.
HowardCohodas is offline Other (Please email T2W with details)  
Old Dec 3, 2010, 5:17am   #59
 
DionysusToast's Avatar
Joined Dec 2009
Re: Watch HowardCohodas Trade Index Options Credit Spreads

Over time, my guess is this will blow up Howards account, although I hope this does not happen.

The trades are based around a mathematically derived probability of certain prices being hit. From what I understand so far, It appears that no market analysis is being performed, rather that if a TOS indicator says that the probability is below a certain threshold then the trade will be taken.

Remember that I have not studied the indicator in question but my presumption is that it will be such that it implies the probability of a losing streak is extremely low - perhaps 1 in a million. Whatever it does imply, it is just a formula and we have seen time and time again the way these formulas fail in real life.

When going over them in retrospect, there appear to be 2 common flaws, certainly in the models that have caused major crashes. The first flaw is in the assumptions fed into the model, these models need inputs and the way some of those are derived looks fairly dumb in retrospect. Obviously the inputs are based on what worked in the past. But assumptions like "house prices will rise 12% per annum indefinitely IS dumb". The second flaw is in failing to grasp the impact the use of the model has on the markets, a model that gets adopted industry wide is never adjusted for the fact that this new model is now going to impact the markets. I presume the TOS model is not used industry wide - so perhaps that issue is not going to be important here.

It appears this trading approach cannot sustain a losing streak. Howard mentions a 30% drawdown if he has a bad months. What about 3 bad months ? It may be statistically impossible but that hasn't stopped these things occuring in the past.

I hope I am wrong - both for Howard and his students but this to me sounds like a Black Swan waiting to happen.

If I am wrong, then Howard has found the Holy Grail. A purely mathematical approach to trading the markets with no technical or fundamental analysis required that will yield a consistent 10% a month.

Good luck.
__________________
Yes - this IS a protest!
DionysusToast is offline Software vendor  
Thanks! The following members like this post: scose-no-doubt , Jack o'Clubs
Old Dec 3, 2010, 6:13am   #60
 
HowardCohodas's Avatar
Joined Sep 2010
Re: Watch HowardCohodas Trade Index Options Credit Spreads

HowardCohodas started this thread
Quote:
Originally Posted by DionysusToast View Post
Over time, my guess is this will blow up Howards account, although I hope this does not happen.

The trades are based around a mathematically derived probability of certain prices being hit. From what I understand so far, It appears that no market analysis is being performed, rather that if a TOS indicator says that the probability is below a certain threshold then the trade will be taken.

Remember that I have not studied the indicator in question but my presumption is that it will be such that it implies the probability of a losing streak is extremely low - perhaps 1 in a million. Whatever it does imply, it is just a formula and we have seen time and time again the way these formulas fail in real life.

When going over them in retrospect, there appear to be 2 common flaws, certainly in the models that have caused major crashes. The first flaw is in the assumptions fed into the model, these models need inputs and the way some of those are derived looks fairly dumb in retrospect. Obviously the inputs are based on what worked in the past. But assumptions like "house prices will rise 12% per annum indefinitely IS dumb". The second flaw is in failing to grasp the impact the use of the model has on the markets, a model that gets adopted industry wide is never adjusted for the fact that this new model is now going to impact the markets. I presume the TOS model is not used industry wide - so perhaps that issue is not going to be important here.

It appears this trading approach cannot sustain a losing streak. Howard mentions a 30% drawdown if he has a bad months. What about 3 bad months ? It may be statistically impossible but that hasn't stopped these things occuring in the past.

I hope I am wrong - both for Howard and his students but this to me sounds like a Black Swan waiting to happen.

If I am wrong, then Howard has found the Holy Grail. A purely mathematical approach to trading the markets with no technical or fundamental analysis required that will yield a consistent 10% a month.

Good luck.
Appropriate concerns all. Like any business I've run, I have a process of quality control of myself and my strategy. Some of these I've mentioned earlier in this thread, but they likely bear repeating. However, lets discuss each of your points in order and see where we go from here.

Probability of Touching
I can't speak to the TOS proprietary model, but I can speak to the one I developed that came close enough to the TOS one to abandon mine and adapt theirs. My inputs were, current price of underlying instrument, strike price, interest rates, days to expiration and volatility. These are the same inputs that TOS reports that they use.

There are quite a few probability models used in options trading, all of which answer slightly different questions but all of which use the same inputs. I don't think the one I am using is any more magic or any less magic than the others.

These models are tools to be used carefully and with attention to the quality of the result they produce to see if the tool is still effective. If the quality assurance process is effective, any change in quality should be detectable before disaster occurs.

Loosing streak
From what I have learned from you, you are probably better at probability stuff than I. My understanding of these probability models is that they can be used as a proxy of the chance of the event happening. If I start with a probability of touching of 10%, then my understanding is that there is only a 10% chance, given the current market conditions, that the underlying instrument price will reach that level.

Were I to use a "set it and forget it" approach to trading, then it's pretty simple to calculate the probability of two successive failure events taking place. Since I actively manage the spreads, the probability of my loosing my maximum limit is less than is implied by the initial probability of touching would indicate. And so is the probability of two successive monthly losses.

Perhaps my explanation of how I derived my estimates was too convoluted because the 30% example was to represent only one half of the funds at risk. To reach the 30% level, would require two consecutive failure months. I tried to use this worst case (one that I never saw in testing) to provide a very conservative estimate of the expected return when losing months were included.

Common flaws in models
All models are based on assumptions and the one I use is not immune from that. All models must be monitored to see if they are effective under current market conditions. The model I use is not immune from that either. I fail to see how my model is more or any less susceptible to these challenges.

Quality Assurance
In my first post in this thread I described the reason for and the use of the journal. It is to monitor the two key components of a trading system, the strategy and the trader. There is a formal process for detecting degradations of performance of the trader separate from the model. These are designed to identify problems before they create a financial disaster.

Conclusion
Will this all continue to work as it does now? Will I be able to detect system failure before there is serious impact on my account? Have I thought of everything?

I don't know. I believe so. I doubt it. In that order.

One of the primary reasons that I started this thread was to learn from those with more experience and wisdom than I. The more I'm challenged, the deeper I have to think, the more I understand the strengths and weaknesses of my approach.

I greatly appreciate all the thoughtful questions that come with this thread.
HowardCohodas is offline Other (Please email T2W with details)  
Old Dec 4, 2010, 2:25am   #61
 
HowardCohodas's Avatar
Joined Sep 2010
Re: Watch HowardCohodas Trade Index Options Credit Spreads

HowardCohodas started this thread Three spreads expired on Thursday and the margin funds were released midday today.
PHP Code:
38  L  11/24/10  12/02/10  DEC1 10   NDX  CALL  2225  2250  1.110  18.C  Expired
39  L  11
/24/10  12/02/10  DEC1 10   NDX  PUT   2050  2075  1.100  18.P  Expired
40  L  11
/26/10  12/02/10  DEC1 10   SPX  PUT   1125  1150  1.500  19.P  Expired 
One spread, part of an Iron Condor developed a roll opportunity
PHP Code:
21  L  10/27/10            DEC 10    RUT  CALL   800   810  0.500   8.C
16  L  10
/18/10  11/23/10  DEC 10    RUT  PUT    590   600  0.950   8.P  Closed Rolled to reform IC
37  L  11
/23/10  12/03/10  DEC 10    RUT  PUT    650   660  0.920   8.P  Closed Rolled to reform IC
42  L  12
/03/10            DEC 10    RUT  PUT    700   710  0.750   8.P  Entered to reform IC 
Four weeklies were opened to form two Iron Condors
PHP Code:
44  L  12/03/10            DEC2 10   NDX  CALL  2250  2275  0.750  20.C  Open
43  L  12
/03/10            DEC2 10   NDX  PUT   2100  2125  1.800  20.P  Open
45  L  12
/03/10            DEC2 10   SPX  CALL  1250  1260  0.500  21.C  Open
46  L  12
/03/10            DEC2 10   SPX  PUT   1150  1175  0.650  21.P  Open 
One of the weekly spreads was constructed improperly. Repair to be attempted on Monday
See spread 45 above.

Yield summary for expired series. All were weeklies.
38 4.6%
39 4.6%
38 & 39 combined as an iron condor 9.7%

40 6.4%

Dashboard (link in signature) is updated to reflected all changes.

Last edited by HowardCohodas; Dec 4, 2010 at 2:29am. Reason: Dashboard note
HowardCohodas is offline Other (Please email T2W with details)  
Old Dec 4, 2010, 2:35am   #62
 
HowardCohodas's Avatar
Joined Sep 2010
Re: Watch HowardCohodas Trade Index Options Credit Spreads

HowardCohodas started this thread
Quote:
Originally Posted by DionysusToast View Post
Over time, my guess is this will blow up Howards account, although I hope this does not happen.
After reading my response, can you think of anything I can do better to minimize the possibility of disaster? You always make me think hard about the issues you bring up, and I try to undergo continuous improvement.

You are now a partner in my success (or failure), without pecuniary risk or reward.
HowardCohodas is offline Other (Please email T2W with details)  
Old Dec 5, 2010, 3:48pm   #63
 
HowardCohodas's Avatar
Joined Sep 2010
Re: Watch HowardCohodas Trade Index Options Credit Spreads

HowardCohodas started this thread It would appear that my interest in options dates back even further than I initially recalled. While moving into my new office... Well actually, while moving from the small bedroom into the one my son had while is lived at home, I've been reconfiguring the contents and location of my library.

I just came across a small book titled "Planned Profit Through Hedging, a quick course in investment strategy" by Robert W. Brickel self published in 1974. Options are prominent throughout the work, however he never mentioned or showed an Iron Condor. It was still fun to skim through it.
HowardCohodas is offline Other (Please email T2W with details)  
Old Dec 5, 2010, 4:39pm   #64
 
arabianights's Avatar
Joined Jan 2007
Re: Watch HowardCohodas Trade Index Options Credit Spreads

You won't ever blow up if you reduce size religiously in proportion to your account, given that you have a quantifiable downside.

However, you may have a system that almost surely will make your account approach an asymptote at 0...
__________________
World's leading STIRs chatroom - www.propboards.com - register, then click on chat. Don't let the lack of posts on the forum put you off - the action happens in the chatroom. Targeted at locals, but hedge funds, brokers (including IDBs), market makers, and a few sizable amateurs are all represented. When it's quiet, banter is encouraged and anything goes.

No nuisance spread betters please. Anyone else welcome.
arabianights is offline  
Closed Thread

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
An interview with HowardCohodas arabianights General Trading Chat 55 Feb 19, 2011 5:01pm
Article: Debit Spreads Vs Credit Spreads T2W Bot Educational Resources 0 Oct 23, 2010 12:46am
ig index spreads are Bakez Spread Betting & CFDs 1 Oct 11, 2010 9:40pm
IG Index FX spreads fiftyfifty Spread Betting & CFDs 10 Jan 22, 2008 4:29pm

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)